Integration versus segmentation in a dealer market

Abstract

This paper compares two trading mechanisms in a dealer market with several securities, asymmetric information and imperfect competition. These two market structures differ in the information received by market makers. While in the first of them they observe the order flows of all assets when setting prices, in the second setting market makers are assumed to observe the order flow corresponding to one security. In order to make this comparison, we analyze several market indicators such as the volatility and the informativeness of equilibrium prices and the unconditional expected profits of insiders under both regimes.